Does real interest rate parity really hold? New evidence from G7 countries

Chang, Ming‐Jen; Su, Che-Yi

doi:10.1016/j.econmod.2015.03.005

Cited by 14 publications

(18 citation statements)

References 45 publications

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“…They strongly argued that the US monetary condition passes on to most emerging markets through short and long-term interest rates. Chang and Yi (2015) reviewed the real interest rate parity condition by using modern tools such as sharp transition and smooth transition models. They evidenced the real interest rate parity condition mostly holds.…”

Section: Related Literaturementioning

confidence: 99%

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2020

Asian Development Policy Review

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This study measures the extent of crosscountry financial shock spillover by utilizing Diebold and Yilmaz (2009); Diebold and Yilmaz (2012) method and using the impulse response function of the VAR model, it explores the important channel through which financial shocks transmit among the US, Japan, Germany, China, India, and Russia. The result shows that total financial shock spillover is 43.60%, indicating that slightly more than two-fifths of the total variance of the forecast errors for six countries under consideration is explained by their shock spillover across countries. The finding is observed to be robust. Using the impulse response of the VAR model, we examined the relative importance of channels viz. financial, exchange rate, and trade. We observed that 46% of external financial shocks transmit to US through the financial channel, while it is predominantly the trade channel through which shocks transmit to Japan (43%), Germany (43%), and China (76%). India receives major shocks (74%) through exchange rate. Finally, trade and financial channels are important for Russia through which 76% of shocks come from external financial markets. The spillover is observed to be high which could be because of the increasing deregulation of financial markets including capital mobility in 21 st century. Contribution/ Originality: This study contributes in four ways: (i) it considers both advanced and emerging economies, (ii) captures financial shocks through composite interest rate index (IRI), (iii) employs spillover method developed by Diebold and Yilmaz (2009); Diebold and Yilmaz (2012) and (iv) examines the contribution of channels which previous literature did not address. 1. INTRODUCTION The crosscountry financial shock spillover remains alive in the history of global economy. For instance, the Asian Financial Crisis (1997-98) and the Global Financial Crisis (2007-09) 1 had the genesis in specific regions and 1 Asian Financial Crisis (1997-98) alternatively called as Asian Contagion defined as a sequence of currency devaluation and other follow up of economic events that stared in 1997 and impacted many countries. Global Financial Crisis (2007-09) began in 2007 from subprime mortgage market in the USA and took the turn of a great depression of 1930's. It advanced into fullblown global banking crisis with the collapse of the Lehman Brother's Investment Bank in 2008.

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Section: Related Literaturementioning

confidence: 99%

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2020

Asian Development Policy Review

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“…The irp states that the difference between interest rates in two countries is the difference between the future rate and the current rate of their currencies (Adrangi, Raffiee, and Shank 2007;Cherop and Changwony 2014;Lo and Morley 2015). The theory states that real interest rates should be equalized across countries under fully liberalized financial markets without government interventions and capital controls (Chang and Su 2015). If this parity is broken, then there is the existence of an arbitrage resulting in a risk-free return (Edison 1987).…”

Section: Interest Rate Parity (Irp) and Purchasing Power Parity (Ppp)mentioning

confidence: 99%

“…If this parity is broken, then there is the existence of an arbitrage resulting in a risk-free return (Edison 1987). According to this theory, if an investor makes his own forecasts by using rational expectations and, at the same time, the international capital markets and the product markets are in-tegrated well enough, then real interest rates must be equal across countries (Chang and Su 2015). ppp in its own sense is a theory of long term equilibrium exchange rates based on relative price levels of two countries (Cherop and Changwony 2014).…”

Section: Interest Rate Parity (Irp) and Purchasing Power Parity (Ppp)mentioning

confidence: 99%

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2018

MGT

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The main goal of this paper is oriented on examining the potential link between economic growth and health expenditure in the South-Eastern European Health Network (seehn) countries over the period 1995-2014 by applying panel econometrics. The panel co-integration testing approach and panel vecm are used to investigate the long-and short-run causality between the economic growth, health expenditure and life expectancy (trivariate model). The empirical results show that there is a long-run relationship between the observed variables. It was confirmed that health is a luxury good in the long term, while it is a necessity product in the short term. Finally, it should be noted that economic policy in these countries should be directed to the targeted increase in expenditure on health care, in order to increase overall economic activity. Also, the economic policy should be oriented to adequate combination of public and private financing in health care.This study examines the macroeconomic implications of exchange rate depreciation in Nigeria. It employs the Autoregressive Distributed Lag Bounds Testing Cointegration approach for data covering the period of 1970 to 2015. Empirical results confirm that the Naira depreciation positively and significantly impact all the indicators of macroeconomic performance except for output per capita, which is found to be insignificant. This implies that Naira depreciation stimulates trade balance; promotes price instability and increases the interest rate. Thus, currency depreciation does not benefit the country's economy. Moreover, the study confirms that long-run relationship exists between exchange rate depreciation and macroeconomic performance in Nigeria. Thus, there is the need for trade and export diversification to sustain gains from exchange rate movements and mitigate its negative effects on the economy.

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“…(), Byrne and Nagayasu (), Tsong and Lee (), Albulescu et al . (), Chang and Su (), and Corakci et al . () used different panel unit root tests and again, supported the parity hypothesis across most pairs of countries.…”

Section: Introductionmentioning

confidence: 95%

“…They supported the stationarity for some pairs and rejected it for some other pairs. Suspecting that univariate unit root tests suffer from low power, Camarero et al (2010), Byrne and Nagayasu (2012), Tsong and Lee (2013), Albulescu et al (2016), Su (2015), andCorakci et al (2017) used different panel unit root tests and again, supported the parity hypothesis across most pairs of countries.…”

Section: Introductionmentioning

confidence: 99%

Real Interest Rate Parity and Fourier Quantile Unit Root Test

Bahmani‐Oskooee

Chang

Elmi

et al. 2018

Bulletin of Econ Res

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Real interest rate differentials usually exhibit two properties; structural breaks and asymmetric dynamics. In this paper, we use various types of Quantile Unit Root Test (QURT) which accounts for both properties. Unlike previous research, we reject the unit root in the real interest rate differentials in 18 out of 21 OECD countries as well as in 4 out of 5 BRICS countries using QURT with sharp and smooth breaks.

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Does real interest rate parity really hold? New evidence from G7 countries

Cited by 14 publications

References 45 publications

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Real Interest Rate Parity and Fourier Quantile Unit Root Test

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